A commercial electricity bill can charge for two different things. The energy charge measures how much electricity accumulated across the billing period, while the demand charge measures how hard the customer drew power at its most demanding moment.
Those quantities use different units. Energy is billed in kilowatt-hours, while demand is billed in kilowatts, because it describes a rate of power rather than an accumulated amount.
Demand is usually read from the highest 15-minute interval recorded during the billing period, so one difficult quarter-hour can shape the bill even when monthly consumption looks ordinary. That is why two businesses can consume identical amounts of electricity and still receive very different bills: their kilowatt-hours match, and the shape of their demand does not.
One bill, two different charges
The default inputs in the demand charge calculator are a 10-kilowatt peak, 3,000 kilowatt-hours of monthly consumption, a demand rate of $15 per kilowatt, and an energy rate of $0.12 per kilowatt-hour.
Both rates are illustrative inputs rather than market figures or any particular tariff. The tool page describes the $15 per kilowatt as an illustrative middle of a range the National Renewable Energy Laboratory found spanning under $5 to over $50 across more than 10,000 United States commercial and industrial tariffs, and the 12 cents is illustrative in the same way.
Demand charge = 10 kW × $15 per kW = $150.00
Energy charge = 3,000 kWh × $0.12 per kWh = $360.00
Total bill = $150.00 + $360.00 = $510.00
Demand share = $150.00 ÷ $510.00 × 100 = 29.4 percent
The customer pays $360.00 for the energy accumulated through the month and another $150.00 for reaching a 10-kilowatt peak, so demand accounts for 29.4 percent of this two-part bill.
Kilowatts and kilowatt-hours are related but not interchangeable. A kilowatt states how fast power is being drawn at a moment or across a measurement interval, while a kilowatt-hour records how much energy accumulated as that rate continued through time.
The infrastructure serving a customer has to accommodate that customer's hardest interval rather than their monthly average. The demand charge prices the capacity requirement and the energy charge prices the electricity delivered, which is the whole reason a tariff separates them.
This structure is normally associated with commercial and industrial accounts. Residential customers should not be assumed to pay demand charges as a rule, although some utilities have introduced residential demand rates in particular service territories.
Dividing the complete bill by its consumption puts both charges over the same denominator and produces an effective all-in rate.
Effective all-in rate = $510.00 ÷ 3,000 kWh = $0.1700 per kWh
The posted energy rate is 12 cents a kilowatt-hour, but this bill works out at 17 cents once demand is included. Load factor explains the five-cent difference.
Load factor connects the two halves
Load factor compares average power against peak power. A high load factor means demand stayed relatively even; a low one means the peak stood far above the level sustained through the rest of the month.
The calculator does not compute it, because it needs the length of the billing period and the engine has no such input. For a monthly figure this guide divides a 365-day year of 8,760 hours into twelve equal periods.
Average month length = 8,760 hours ÷ 12 = 730 hours
A real billing period runs 28 to 31 days, so its hours differ from this 730-hour convention, and both load factor and the adder derived from it move a little when the actual period length is used.
Load factor = Monthly kWh ÷ (Peak kW × Hours)
Default load factor = 3,000 kWh ÷ (10 kW × 730 hours)
Default load factor = 0.411, or 41.1 percent
The default business drew, on average, 41.1 percent of the power it drew during its worst interval. Load factor is not a charge on any tariff — it is a description of the relationship between usage and peak, and it is what makes the demand charge comparable with the energy rate.
Turn the demand charge into a per-kilowatt-hour adder
The demand charge can be spread across every kilowatt-hour consumed in the month. Take the demand rate and divide it by the load factor and the hours in the period.
Demand adder per kWh = Demand rate ÷ (Load factor × Hours)
Default demand adder = $15 per kW ÷ (0.411 × 730 hours)
Default demand adder = $0.0500 per kWh
That five-cent adder is not a new assumption. It is the same $150.00 demand charge, spread across 3,000 kilowatt-hours and expressed in the unit the energy rate already uses.
Demand adder = $150.00 ÷ 3,000 kWh = $0.0500 per kWh
There is an independent check available. Subtracting the stated energy rate from the effective all-in rate isolates whatever demand contributed.
Demand adder = $0.1700 per kWh − $0.1200 per kWh
Demand adder = $0.0500 per kWh
All three routes agree exactly, and that agreement is the proof of the identity: the demand rate divided by load factor and hours is the same quantity as the demand charge divided across monthly energy. It also shows why one tariff can produce sharply different effective prices, because with the rate and the period fixed, load factor alone decides how much demand cost lands on each kilowatt-hour.
| Load factor | Demand adder per kWh | Energy rate per kWh | All-in rate per kWh |
|---|---|---|---|
| 20.0% | $0.1027 | $0.1200 | $0.2227 |
| 41.1% | $0.0500 | $0.1200 | $0.1700 |
| 60.0% | $0.0342 | $0.1200 | $0.1542 |
| 80.0% | $0.0257 | $0.1200 | $0.1457 |
Every row uses the same illustrative $15-per-kilowatt demand rate and 12-cent energy rate, and only load factor changes. At 20 percent the effective price is 22.27 cents a kilowatt-hour; at 80 percent it is 14.57. The lower-load-factor business pays 52.9 percent more per kilowatt-hour on an identical rate card.
The same point can be made holding energy at exactly 3,000 kilowatt-hours in every case. A lower load factor then requires a higher peak, because the same quantity of energy is being drawn less evenly across the month.
| Load factor | Peak demand | Demand charge | Energy charge | Total bill | Demand share |
|---|---|---|---|---|---|
| 20.0% | 20.55 kW | $308.22 | $360.00 | $668.22 | 46.1% |
| 41.1% | 10.00 kW | $150.00 | $360.00 | $510.00 | 29.4% |
| 60.0% | 6.85 kW | $102.74 | $360.00 | $462.74 | 22.2% |
| 80.0% | 5.14 kW | $77.05 | $360.00 | $437.05 | 17.6% |
Consumption is identical in every row and the energy charge stays at $360.00 throughout. The entire spread from $437.05 to $668.22 comes from power.
The ceiling on load factor is a floor under the rate
Load factor cannot exceed 100 percent, because average power cannot be higher than the peak that average is measured against. That ceiling puts a floor under the all-in rate, and the floor is worth knowing before any effort is spent chasing it.
Best-case adder = $15 per kW ÷ (1.00 × 730 hours)
Best-case adder = $0.0205 per kWh
Best-case all-in rate = $0.1200 + $0.0205 = $0.1405 per kWh
On this illustrative tariff, demand adds at least 2.05 cents to every kilowatt-hour no matter how flat the load becomes. That is the whole reachable range: from 14.05 cents at a theoretical 100 percent, through 14.57 at 80, to 22.27 at 20 and upward from there.
A load factor of 100 percent would mean drawing exactly the same power in every hour of the month, including nights, weekends and shutdowns, which no real site does. The practical floor therefore sits above 14.05 cents, and the gap between a site's current figure and its realistic best is the size of the prize.
Why cutting energy alone can disappoint
Suppose consumption falls 20 percent, from 3,000 to 2,400 kilowatt-hours, while the 10-kilowatt peak is unchanged. The energy charge falls with the usage, and the whole $150.00 demand charge survives.
Reduced energy charge = 2,400 kWh × $0.12 per kWh = $288.00
New total bill = $150.00 + $288.00 = $438.00
Bill reduction = ($510.00 − $438.00) ÷ $510.00 × 100 = 14.1 percent
A 20.0 percent cut in usage produces a 14.1 percent cut in the bill. One component declined and the other did not move, which is all that has happened.
The effective price per kilowatt-hour actually rises, because the unchanged demand charge is now spread over fewer units. The customer buys fewer kilowatt-hours and each one carries a larger share of the demand cost.
New effective rate = $438.00 ÷ 2,400 kWh = $0.1825 per kWh
New load factor = 2,400 kWh ÷ (10 kW × 730 hours) = 32.9 percent
The all-in rate moves from $0.1700 to $0.1825 and load factor falls from 41.1 percent to 32.9. The saving is real, but the unchanged peak caps it. The energy bill estimator is the right tool where a bill follows consumption alone; once demand pricing applies, a kilowatt-hour-only view cannot explain the whole amount due.
What changes when the peak falls
Now hold consumption at 3,000 kilowatt-hours and cut the peak by 30 percent, from 10 kilowatts to 7. The energy charge does not move, and the demand charge falls with the peak.
New demand charge = 7 kW × $15 per kW = $105.00
New total bill = $105.00 + $360.00 = $465.00
Monthly saving = $510.00 − $465.00 = $45.00
Bill reduction = $45.00 ÷ $510.00 × 100 = 8.8 percent
The lower peak saves $45.00 a month, or 8.8 percent of the original bill, without saving a single kilowatt-hour. The effective rate falls to $0.1550 and the load factor rises to 58.7 percent.
New effective rate = $465.00 ÷ 3,000 kWh = $0.1550 per kWh
New load factor = 3,000 kWh ÷ (7 kW × 730 hours) = 58.7 percent
Under a flat demand rate with no other tariff rules, every kilowatt taken off the billed peak is worth that demand rate every month. On this illustrative tariff one kilowatt is $15 a month, or $180 across a year.
Monthly value per kW = 1 kW × $15 per kW = $15
Annual value per kW = $15 × 12 months = $180
This guide prices the gap between a current peak and a lower one. It does not recommend equipment, size batteries, prescribe controls, or estimate what any method of closing that gap would cost or return.
Which lever is worth more per point
The two comparisons above moved by different amounts, 20 percent against 30, so they do not settle which lever pays better. Comparing them properly means moving each by the same proportion and reading what one percentage point is worth.
One percent off usage = 30 kWh × $0.12 per kWh = $3.60
One percent off the peak = 0.1 kW × $15 per kW = $1.50
Ratio = $3.60 ÷ $1.50 = 2.4
On this bill a point of usage is worth 2.4 times a point of peak, which is the opposite of the impression the peak-shaving arithmetic tends to leave. The ratio is not a new fact either: it is just the energy charge divided by the demand charge, $360.00 over $150.00, which is the same 2.4.
That gives the demand share a job beyond description. Since the two charges are the only things being compared, the larger one always wins per point, and the levers break even exactly where the demand share reaches 50 percent. Below that, proportional cuts in usage pay more; above it, proportional cuts in peak do.
The defaults sit at a 29.4 percent demand share, so usage is the stronger lever per point there. None of which says the two are equally easy to move by a point, and that part is a question about the site rather than about the tariff.
What the two-part model leaves out
The calculator models one demand rate against one peak, plus one energy rate against monthly consumption. That clean structure is what makes load factor visible, and it does not reproduce every rule in a real tariff.
Demand ratchets can hold billed demand at a fraction of an earlier peak for several months, so lowering the current peak may not lower the billed figure straight away while a prior period still controls it. Seasonal demand rates price peaks differently across the year, and time-of-day demand windows count a peak only during specified hours, which makes the timing of demand matter as much as its size.
Coincident-peak charges can depend on the utility system's peak rather than the customer's own highest interval. Power-factor penalties can add a further charge where current and voltage are used inefficiently, and this model calculates neither.
The $15-per-kilowatt demand rate and the $0.12-per-kilowatt-hour energy rate stay illustrative inputs throughout. Real tariffs may also carry customer charges, taxes, riders, tiered energy prices, minimum bills, and their own definition of which interval sets billed demand.
Broader price context in how much does electricity cost is no substitute for the schedule that applies to the account. The tariff sheet, the billing-period dates, the demand definition and the actual interval data are the source of truth.